You will look at many homes before finding the right one for you. Sites like Zillow allow you to view home listings and see how much a property is worth. Unlike most home listing sites, Zillow includes a price estimate. These ‘Zestimates’ give home buyers more data, but how accurate are they? Knowing the accuracy of these estimates is important since some people may rush to buy a home because the Zestimate is higher than the asking price. Home sellers may feel compelled to list their asking price at the Zestimate estimate. We will share how Zillow makes its estimates and whether you can rely on them.
What are Zillow Estimates (Zestimates)?
Zillow Zestimates are algorithmic calculations that Zillow uses to estimate a property’s value. Buyers and sellers may use these home values as a gauge to get the best deal. Zillow relies on data about the property, location, and other factors. These estimates aren’t perfect, and Zillow explains on their site that the median error rate is 3.2% for on-market homes and 7.52% for off-market homes.
How are Zillow Estimates Calculated?
Zillow’s Zestimate calculates values depending on the property’s square footage, public records, and other features. On-market and off-market properties have different calculation methods.
On-market Property
On-market properties have more available data. As a result, Zillow can more readily comb through this data to create a Zestimate. The increased availability of data explains why Zillow estimates for on-market properties have a lower rate of error.
Off-market Property
These properties have less available data than their on-market counterparts. You can still get data on the location and look at previous sales, but information on the latter isn’t always available. Zillow relies on public data and user-submitted data to assess property values. User-submitted data is more important for off-market properties since these homes usually have less available data. Having fewer data points leads to wider margins of error in Zillow estimates.
What Factors Affect Zillow Estimates?
Understanding how Zillow Estimates work can help buyers and sellers navigate through the process. These factors influence the price Zillow will tell you the house is worth.
Turnover Rate
The turnover rate measures how long it would take for home sales in a community to match the total properties in a community. For example, if a community with 100 homes gets 100 real estate transactions in seven years, the turnover rate is seven years. A high turnover rate indicates a greater home supply. Low turnovers indicate the community has fewer sellers, and it takes longer for properties to swap hands.
The turnover rate isn’t enough to determine the price of a home. Surging demand can compensate for locations with high turnover rates that overwhelm the home supplies. While a low turnover rate may favor the few people who list their homes, the area may not be as desirable.
Some homeowners prefer to stay in an area with low turnover. Low turnover means your neighbors stay the same, and low turnover can indicate that people like the area. If you want to stay in your home but feel like it’s more challenging to keep up with the cost of living, you can get financing via an equity-sharing agreement. Unlike traditional lenders, it gives money without increasing your debt. Instead of giving you a loan, it unlocks your equity in exchange for a portion of your home’s future change in value and receives its share when you sell your home.
Neighborhood Where Property is Located
Location is the most crucial element of any home. A luxurious home in a low-quality neighborhood may struggle to command the same valuation as a smaller home in a better community. Zillow looks at the education system, amenities, crime rate, and other factors when assessing neighborhoods.
Zillow Algorithm
Zillow’s algorithm relies on public, industry, and user-submitted data. The home listing firm also looks at tax records, which can be inaccurate. This data point and insufficient information can lead to inaccuracies. Zillow updates its estimates multiple times per week based on the incoming data.
Zillow’s algorithm responds better to real estate market trends and current data. The home listing firm can look at previous data on off-market properties, but you can expect a higher likelihood of a pricing error.
How Accurate Are Zillow Estimates?
You now know how Zillow comes up with its estimates. But, of course, Zillow isn’t the only company that will estimate the price of homes on and off the market. You can get other prices from other sources, such as realtors and appraisers. Here’s how Zillow compares to those options.
Zillow Estimates vs. Realtors
Zillow’s algorithm uses available data to estimate a price for your home. While Zillow relies on numbers alone, realtors can combine data with personal experiences. They know the local trends and can review comps of recently sold homes in the area. Realtors will do a more detailed Comparative Market Analysis than Zillow’s algorithm. A realtor will also have a greater understanding of the property’s characteristics. For example, your property may have a pool, updated kitchen, and other features that do not impact the Zillow estimate. These features are significant and can raise the value of your home. Realtors can search for opportunities to increase your home’s value, while Zillow only uses past data without personalization.
Zillow Estimates vs. Appraisals
Appraisers look at your home’s exterior and then walk into the premises. This close-up puts the appraiser in a better position to assess your home’s value. Appraisers can spot structural flaws, perks, and other details that Zillow will miss. Zillow concedes on its site that Zestimates serve as a starting point and do not carry the same weight as an appraisal. As a result, Zillow is more likely to be inaccurate than an appraisal.
How do Zillow Estimates Affect the Valuation of Your House?
While a Zillow Estimate will not change your home’s intrinsic value, it will influence how buyers and sellers look at the house. If buyers see a Zestimate lower than the asking price, they may haggle with sellers to lower the price to match the Zillow Estimate. Sellers may not budge from a Zillow Estimate’s price point if the buyer asks for a lower price. Some sellers need every penny to afford rising expenses.
Home buyers and sellers like to lean on data that aligns with their beliefs. This anchoring bias can further complicate the home buying and selling process by increasing disagreements between both parties. Home sellers may overprice their homes by chasing an overvalued Zillow Estimate or leave money on the table by matching a lower Zillow Estimate. Sellers may get stuck on the market longer due to these discrepancies and get stuck with more mortgage payments. Some sellers may feel pressure to sell at a lower price to avoid two mortgage payments if they have already secured their new home.
Consider Accessing Home Equity Instead of Selling Your Home
Looking at your home’s Zillow Estimate can give you the wrong idea about your home’s selling price. Some homeowners raise their prices to match the Zillow Estimate and get no buyers. Other people lower their home prices because of a Zestimate and leave money on the table. Pricing your home is one of the many stresses of selling a home, but you don’t have to sell your property if you don’t want to move.
